26 Feb 2008, Mark Pengelly, Risk magazine
The five-year bonds are part of a $1.5 billion programme by Munich Re to lay off its extreme mortality risk, according to the reinsurer. Extreme mortality bonds – sometimes known as ‘bird flu bonds’ – pay out in the event of mass casualties, such as those inflicted by a flu pandemic.
The bonds were rated A- by New York-based Standard & Poor’s and placed at Libor plus 135 basis points among institutional investors in Europe, the US and Asia. They are linked to a weighted index of mortality rates across England and Wales, the US, Canada and Germany.
Some $706 million in extreme mortality bonds were originated in 2007, according to Goldman Sachs, up from $597 million in 2006. Goldman Sachs, Lehman Brothers and Swiss Re are among the most active dealers in the mortality bond market.
Insurance-linked securities have been affected in different ways by seesawing credit markets over the past eight months. A new demand for genuinely uncorrelated assets has largely benefited catastrophe bonds. Life insurance securitisations, on the other hand, have been battered by the under-capitalisation of monoline insurers that wrapped most of these transactions.
Given this, some insurance structuring houses have pinpointed mortality bonds as an area of growth during 2008. “[Mortality bonds] provide transparent structure, they provide more diverse risk and they give investors a way to manage their exposures by trading in and out of them,” said Shiv Kumar, New York-based head of financial institution structured finance at Goldman Sachs.